This post is part of the 33 Ways to Amplify Your Profit Quickly.
Increasing your revenue is the most exciting way to increase your profit. But how do you increase your revenue?
Well, your total net revenue is your average net price multiplied by your overall sales volume. And your average net price is determined by the list prices of your products, the discount level you give to your customers, the level of your price realization, and the structure of your product mix structure. Meanwhile, your overall sales volume is influenced by the sales opportunities you have, the effectiveness of your sales efforts, and the effectiveness of your marketing programs.
In this section, we are going to discuss these seven sub-levers of revenue increase:
Increase Your List Price (i.e., optimize your Product Pricing).
Reduce Your Discounts (i.e., optimize your Customer Pricing).
Minimize Price Leakages (i.e., optimize your Rebates And Surcharges).
Improve Your Product Mix Margin.
Boost Your Sales Quickly.
Improve the Effectiveness of Your Sales Teams.
Improve Return from Your Marketing Investment.
1. Increase Your List Price (Product Pricing Optimization)
Increasing prices is one of the most powerful levers to amplify your profit. This is because any price increase goes straight to the bottom line (EBITDA). Even a small price increase (e.g., 1-3%) can make a big impact. For example, if you have a 10% EBITDA margin, then any 1% increase in price is a 10% increase in profit.
Many companies are reluctant to increase prices because they are afraid of losing volume. Business managers often overestimate the demand elasticity of their customers. Fortunately, smart and carefully managed price increases rarely create a significant volume drop – especially when your business has other differentiations besides the price.
The objectives:
Increase the profit level.
Capture the customers’ willingness to pay.
Realize the fair value of the products.
Steps to execute:
First, you immediately execute the low-hanging fruit of product pricing optimization:
Interfere with scheduled price increases: make it larger, more deleveraged, and less risky.
Increase prices on products with volatile input factors (especially when the input costs have risen). The increase in raw material prices is a good excuse for the product price increase (and don't forget to add a small percentage on top).
Increase prices on long-tail products (i.e., slow-moving products with lower buying frequency).
Increase prices on side products (i.e., non-traffic drivers). Customers are usually less sensitive to the prices of side products.
Increase prices on end-of-lifecycle products
to encourage migration of customers to newer, higher margin products;
to reap the willingness to pay of late adopters.
Increase prices on products with a competitive edge and sound value proposition – especially if it is a unique product that customers cannot get elsewhere.
Unbundle product combinations that do not stimulate additional sales (i.e., reducing bundling discount).
Then, you find longer-term price-up opportunities.
Gather detailed transaction data (SKU by SKU, customer by customer, from GSV to NSV, including all rebates, discounts, and promotion details).
Internally benchmark price setting by product, by geography, by sales representative, by customer to find price increase opportunities.
Build pricing models to identify new profit areas, and improve mix management.
After that, you can create price increase scenarios, model the scenarios, and simulate the product price increase. Then, based on the impact, choose the best option and set price increase targets.
Once you have done so, you can prepare detailed action plans. Don't forget to include price increase communication in your action plans.
Develop customer price increase stories and communication materials.
Train the sales team to deliver the stories.
Equip them with the communication materials.
Finally, execute the plans.
Tips:
A price increase is a short-term solution to boost your profit as it does not guarantee a long-term competitive advantage. Once you get additional breathing room from a price increase, make sure to pay attention to your differentiation and your market positioning. Make sure your pricing strategy aligns with your overall growth strategy to sustain a long-term profit boost (see also Strengthen Your Growth Strategy).
2. Reduce Your Discounts (Customer Pricing Optimization)
Reducing discounts is essentially increasing prices. However, it is usually easier to reduce discounts than to increase prices.
Different customers have different willingness to pay. This is often true not only for B2C customers but also for B2B customers (i.e., some companies are less price sensitive than other companies). If you can reduce the non-needed discounts, you capture more value for your company.
The objectives:
Improve short-term profit.
Differentiate prices customer by customer to capture their willingness to pay.
Use discounts to generate more profit (not more volume).
Steps to execute:
First, you start by immediately capturing the low-hanging fruit of customer pricing optimization:
Immediately scrutinize all pricing decisions/deals, especially in the B2B context, and stop bad deals.
Stop non-compliant discounting practices. For example, when the customer’s order volume is below the threshold.
Update the discount policy.
Remove unneeded discounts which are not stimulating enough sales.
Change the oversimplified and not granular enough discounts (e.g., move from arbitrary percentage steps to continuous percentage formula, make the steps smaller).
Lower discounts for small, transactional accounts/customers.
Change unconditional elements in to conditional (i.e., pay-for-performance) discounting.
Develop a discount calculator and apply it rigorously (e.g., model discounts based on volumes, margin, and mix objectives)
Renegotiate problematic, large contracts. Eliminate over-discounting.
Invest in strategic customers with immediate growth potential. Use discounts to generate big profits (e.g., winning new customers).
Then, you can find longer-term opportunities.
Collect data and identify options.
Gather detailed transaction data (SKU by SKU, customer by customer, from GSV to NSV, including all rebates, discounts, and promotion details).
Review contracts and other possible factors that restrict your capability to reduce discounts.
Segment customers and assess pricing per customer.
Price realization by customer. To see the lowest margin customers.
Price-to-margin-waterfall by customer. To see where you lose value.
Simulate customer price increase options, evaluate risk and mitigation options, and set targets.
Create discounting calculator to be implemented. Use advanced analytics to build: Discount models, Price elasticity curves, Sales quotation app, etc
Once you have done so, you can prepare detailed action plans. Don't forget to include price increase communication in your action plans.
Develop customer price increase stories and communication materials.
Train the sales team to deliver the stories.
Equip them with the communication materials.
Finally, execute the plans.
Tips:
Be careful not to annoy your strategic customers. Depending on your strategy and positioning, sometimes you want to develop a strategic partnership, instead of a transactional relationship with your customers.
3. Minimize Price Leakages (Rebates and Surcharges)
Sometimes the prices your company actually realize are not the same as the prices you aim for. This is because of many unseen leakages in price realization. Removing price leakages is essentially increasing your price realization (and your profit).
The objectives:
Monitor price realization.
Enforce contract compliance (e.g., ensure the increased prices are realized, and ensure the given rebates are well-deserved).
Reallocate trade investments (e.g., promos, discounts, offers).
Start charging for value-added services (i.e., introduce surcharges).
Steps to execute:
First, you take immediate actions to reduce price leakages/improve price realization:
Apply contract terms rigorously (e.g., conditions for cash discount, minimum order quantities), both standard and customer-specific terms.
Enforce compliance with discounting rules (especially on pay-for-performance elements).
Cut non-performing trade investments (promo spend) and discounts.
Spend more promo where the highest returns are achieved.
Charge for Value Added Services given away for free (especially relevant for product firms offering a wide array of services (e.g., speedy delivery, small orders, unique customization, repair, maintenance, data service, integration service, technical service).
Enforce surcharges for Value Added Services for all non-key customers.
Improve product mix by upgrading customers to higher-margin products.
Then, you can find longer-term opportunities.
Collect data and identify options.
Gather detailed transaction data (SKU by SKU, customer by customer, from GSV to NSV, including all rebates, discounts, and promotion details).
Review contracts and other possible factors that restrict your capability to reduce discounts.
Assess the implementation of:
Contract terms by customer.
Surcharge pricing by customer.
Build a mathematical model to optimize promo effectiveness, including simulating promo cuts and re-distribution.
Simulate the impact of contract terms execution, charging for services, and customer price increase options. Then, you can set targets.
Once you have done so, you can prepare detailed action plans. Don't forget to include price increase communication in your action plans.
Develop customer price increase stories and communication materials.
Train the sales team to deliver the stories.
Equip them with the communication materials.
Finally, execute the plans.
Tips:
Ensure your surcharges and rebates policy align with your overall strategy and positioning. Sometimes, not charging for surcharges is the right thing to do. In the other times, charging is what you need to do.
4. Improve Your Product Mix Margin
An alternative to price increase: you can improve your product mix margin instead. You can do this by shifting customers to the higher margin products (up-selling), getting customers to buy other products (cross-selling), killing your non-profitable or low-margin products (product rationalization), and tweaking your product to increase the margin (value engineering).
The objectives:
Improve total margin from each customer (without direct price increase).
Sell more profitable products.
Eliminate complexity and costs by killing long tail of non-profitable products.
Steps to execute:
First, you start by immediately capturing the low-hanging fruit:
Tweak your product to increase margin, e.g., smaller size, cheaper packaging, fewer features, etc. Most of the time, there are many non-essential features in your products.
Eliminate negative gross margin SKUs – unless there is a strategic reason behind it. Remember, from the economic point of view, anything with a negative variable cost is not worth selling (the more you sell, the more you lose, not even enough to cover the overheads). Make sure you challenge the reasons hard.
Then, you can find longer-term opportunities:
Review opportunities by customer/sales channel.
Prioritize opportunities.
Set improvement targets.
Finally, prepare detailed action plans and execute them.
Raise the intensity of upselling effort.
Track progress.
5. Boost Your Sales Quickly
Increasing your sales volume (selling more) is one of the interesting levers. The possibility is vast for creative people. You can sell more of the existing products to the existing customers, sell the existing products to new customers, sell a new product to the existing customers, or sell a new product to new customers. You can introduce new services, enter new countries, move into new value chains, or go to a new industry.
The objectives:
Capture short-term sales opportunities in all products, customers, channels, or regions.
Sell as much as possible while maintaining similar discounts and cost levels.
Steps to execute:
First, you quickly boost short-term sales opportunities.
Raise the intensity of outbound sales calls to increase sales.
Push sales via distributors.
Increase product coverage on all channels/platforms. Ensure listing on all relevant channels/platforms.
Then, you can review opportunities by sales channel for longer-term sales push.
Inside sales: Review pipeline, prioritize leads, and revisit targets.
Direct sales: Analyze product group penetration for large accounts, determine who to target by how much, and revisit sales targets.
Distributor: Benchmark distributor performance and define priority actions.
eCommerce: Identify priority gaps in platform listings, review new platforms listing, increase product coverage on platforms, and launch short-term marketing push.
Afterward, prepare detailed action plans, set sales targets, and tracking.
Finally, execute the plans.
6. Improve the Effectiveness of Your Sales Teams
To enable a longer-term sales increase, you will need to create a high-performing sales team. A good sales team generates higher sales, accelerates growth, and improves customer satisfaction.
The objectives:
Optimize sales costs.
Reduce the cost-to-serve in all channels.
Steps to execute:
First, you should take immediate actions to increase sales effectiveness.
Remove non-performing sales representatives. It will reduce costs and stimulate sales performance.
Increase sales incentive target levels.
Adjust the incentive scheme to be gross-margin driven, not only volume driven.
Temporarily shift field salespeople to do inside sales, while you review key products and customer groups.
Then, you can find longer-term opportunities:
Gather data.
Number of sales representatives and cost per sales representative by customer and by channel.
Full-Time Employees and costs by rep/by channel/by customer.
Incentive schemes for each sales representative.
Performance by each sales representative.
Other relevant data.
Assess sales performance.
External benchmarking, e.g., cost per sales representative, total cost, number of sales representatives by channel.
Internal benchmarking: performance between various sales representatives.
Incentive model analysis: are the incentives effective?
Interviews to calibrate findings and workshops to agree on issues.
Identify opportunities and define targets.
Identify opportunities for short-term cost improvement by channel/customers through workshops.
Define targets for selected opportunities.
Afterward, you can create detailed action plans for execution.
Finally, you execute the plans.
Tips:
External benchmarks are very useful in pushing the sales team out of their comfort zone. It serves as the anchor during the performance benchmark. You can easily get the benchmark from various providers online. Alternatively, you can do a cost-effective online survey, or speak to experts in your industry.
7. Improve Return from Your Marketing Investments
To increase profit, you need to eliminate ineffective marketing while investing more in effective marketing. Effective marketing can boost your profit up very quickly (it is one of the most powerful levers of PAP), but you need to understand the rate of return from your marketing operations.
The objectives:
Review and improve marketing operations to drive growth in revenues.
Reduce cost per acquisition.
Reduce media and agency fees while improving/maintaining visibility.
Steps to execute:
First, you quickly reduce marketing costs.
Media/promotion spending.
Eliminate brand marketing spending (wait until you understand the effectiveness of the marketing spend).
Eliminate communication spending.
Eliminate sponsorships.
Review performance marketing/ consumer promotions and ensure cost-of-acquisition is higher than customer lifetime value.
Agency spending.
Realign rates to market without changing talent/mix.
Eliminate overhead FTE charges. Often, a quick renegotiation can eliminate many ‘silly’ charges.
Ensure no double charges for the same agency resources.
Then, you can find longer-term opportunities:
Analyze marketing performance in detail.
Spend and budget by categories: media, promotions, agencies, etc.
Break down by channel, country, product, campaign, etc.
Calculate the return on marketing investment, both for the short-term and long-term.
Standardized KPIs, tools, and definitions.
Organizational structure, skills, and culture.
Marketing tools, planning processes, and decision-making processes.
Benchmark internally and externally.
Direct marketing operational costs.
Marketing overheads.
Identify short-term opportunities and define long-term impacts.
Determine areas for increasing efficiency (achieving the same impact with less costly marketing) and effectiveness (putting more investment to generate a much higher impact).
Assess the impact of the identified initiatives.
Afterward, you prepare detailed action plans.
Finally, you can execute the plans.
Tips:
Use the return on marketing investment as the central driver of your marketing organization/operations.
To see other ways to improve your profit, check the 33 Ways to Amplify Your Profit Quickly.
Alternatively, to continue exploring winning strategy, click here.
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